ANNOUNCER: Consumers use plastic for 100,000 transactions a minute. It has produced billions in profits and nearly a trillion dollars in debt.

MARTIN EAKES, CEO, Center for Responsible Lending: Americans simply cannot pay back the level of debt that has grown over the last 30 years.

ANNOUNCER: And the credit card industry even played a hand in the economic meltdown.

ROBERT McKINLEY, Credit Card Industry Analyst: You had consumers refinancing their homes to pay off all their credit cards, and then they went back out and built their credit cards back up.

ANNOUNCER: Now, as credit card losses are piling up, the government is stepping in.

TIMOTHY GEITHNER, Secretary of the Treasury: We need to fix the rules and make them tougher with a simple, clear, single mission to protect consumers.

LOWELL BERGMAN, Correspondent: Why hasn't there been credit card legislation to control some of these abusive practices? Why did it take a near depression?

Sen. RICHARD SHELBY (R-AL), Banking Committee: Lobbying power.

ANNOUNCER: Tonight on FRONTLINE, correspondent Lowell Bergman and The New York Times investigate the battle over The Card Game.

LOWELL BERGMAN, Correspondent: [voice-over] Twenty years ago, credit cards were a stable, profitable part of the banking industry. But then a brash new player arrived on the scene who would help change everything, turning a relatively staid business into a multi-billion-dollar bonanza.

It was a company called Providian Financial, and its former CEO lives here, in this estate modeled after the White House. His name is Shailesh Mehta, and since he left Providian, he has never agreed, until now, to be interviewed about the company.

SHAILESH MEHTA, Former CEO, Providian Financial: Providian was a very profitable business. We made over $180 million quarterly profit.

LOWELL BERGMAN: [on camera] Almost a billion dollars a year.

SHAILESH MEHTA: We were making a billion dollars a year.

LOWELL BERGMAN: In profit.

SHAILESH MEHTA: In profit before tax.

LOWELL BERGMAN: [voice-over] And while Providian was successful, their name would become synonymous with the tricks and traps that have entangled so many credit card customers.

[on camera] It made you the poster boy for what's wrong with credit cards.

SHAILESH MEHTA: It made us the poster boy. We were the poster boy, correct.

LOWELL BERGMAN: [voice-over] Mehta says he agreed to this interview because he thinks Providian's reputation was unwarranted. He believes they were pioneers who gave credit to those who previously did not qualify, the riskiest of borrowers.

SHAILESH MEHTA: There were 30 to 40 million potential households, prospects, have no credit cards. So we said, "How do we meet the needs of these people who do not qualify for a regular credit card?"

LOWELL BERGMAN: [on camera] So they're lower-income people?

SHAILESH MEHTA: So they're lower-income people. They were bad credits. They were bankrupts. There were young credits, there were no credits

LOWELL BERGMAN: They were called un-banked people?

SHAILESH MEHTA: Yeah. We labeled them "un-banked." That was a word that came out of Providian, the un-banked market. And then it became like an industry standard word.

LOWELL BERGMAN: And so your business took off?

SHAILESH MEHTA: And our business took off.

PROVIDIAN COMMERCIAL: I got a Visa Gold with a $1,000 credit line. People treat you differently when you have a gold card. And with Providian, my credit just keeps getting better. Visa from Providian. We approve.

LOWELL BERGMAN: [voice-over] People jumped at the chance to get a credit card, seeing it as a passport to a more affluent lifestyle. And Providian was betting that these riskier customers were more likely to carry a balance.

[on camera] So what you were going after were the people who weren't going to pay their bill off in full.

SHAILESH MEHTA: In full, yeah. And if we do so, then we will be attracting the profitable segment of the credit card industry.

LOWELL BERGMAN: And your hope was to keep them paying, basically, in perpetuity, right?

SHAILESH MEHTA: Their-

LOWELL BERGMAN: You never wanted them to really pay it off.

SHAILESH MEHTA: Yeah. If they- if they make the minimum payment, yes, then that loan will take almost 20 years to pay back. Absolutely.

LOWELL BERGMAN: And you make more money then.

SHAILESH MEHTA: We make more money.

LOWELL BERGMAN: [voice-over] When Providian began, Mehta ran the company with this man, Andrew Kahr, already a legendary innovator in the world of consumer finance. Kahr spoke to us five years ago.

ANDREW KAHR: Many of the things that I've been involved with were in the back room, on the operating side.

LOWELL BERGMAN: Kahr had a peculiar genius for enticing new customers with gimmicks that were too good to be true

ANDREW KAHR: When you're getting something in the mail several times a week that offers you zero percent for six months, or whatever it may be, they look at the headlines of the solicitation in the mail. They spend 30 seconds on it. And, "OK, I'm going to be better off at the beginning. They're going to give me something. They're going to give me zero percent rate." People believe what they want to believe.

LOWELL BERGMAN: It was Kahr who came up with the ideas and Mehta who implemented them, and their innovations would help change the nature of the credit card business.

[on camera] So Providian wasn't alone.

ROBERT McKINLEY, Founder, CardWeb.com: Absolutely not. They may have started it and maybe were the innovators of these bad practices, but they certainly were quickly adopted by everyone else when they started seeing the profit margins.

LOWELL BERGMAN: [voice-over] Robert McKinley is a credit card analyst who followed the rise of Providian.

ROBERT McKINLEY: I mean, here they were giving away products with no fee and charging interest rates and making a ton of money. And so, "Hey, let's do it, too." And so, you know, it quickly spread throughout the entire industry.

LOWELL BERGMAN: One of the many Providian practices that spread was making people believe their credit cards were free by eliminating the then standard annual fee.

SHAILESH MEHTA: We made it look like it's a giveaway and took it back in the form of- I used to use the word "penalty pricing" or "stealth pricing."

LOWELL BERGMAN: [on camera] So the competition, the increase in competition, led to the use of penalty fees, bigger penalty fees.

SHAILESH MEHTA: Bigger penalty fees.

LOWELL BERGMAN: And you were operating with your penalty fees, like everyone else.

SHAILESH MEHTA: Well, we all had to make up somewhere because everybody had to waive their annual fee to stay competitive. Where do you make your money? So everybody increased the late fees. Everybody started increasing the over-limit fees. And when people make the buying decision, they don't look at the penalty fees because they never believe they'll be late. They never believe they'll be over-limit, right?

ELIZABETH BLASCRUZ: We were having some financial issues. We'd changed careers.

LOWELL BERGMAN: [voice-over] Elizabeth Blascruz learned all about stealth pricing when she got a credit card from one of Providian's competitors.

ELIZABETH BLASCRUZ: I got an offer for a credit card with a credit line of $500. So I was happy to take that credit card. And that's kind of when it all started. I remember when the balance was about $480 or so, and I was late on a payment. They added on a late fee and increased my interest rate. Well, that, of course, took it above the $500 credit line.

And with that, they charged me an over-the-limit fee. That bill had maybe $60, $70 dollars of fees. And every month, it was the same thing. Unless I paid all that and more, which of course, at the time, I couldn't afford to do, there was no way I could ever get ahead.

LOWELL BERGMAN: Blascruz says she ended up paying $3,000 dollars. That's five times more in interest and fees than the original $480 dollars she actually spent on purchases. She was caught by the traps hidden in plain sight.

Credit card companies are required by law to explain the rules of the game. It's called disclosure. It's in those solicitations that come in the mail. Even Shailesh Mehta gets them.

[on camera] Open this one for me and tell me what you think. That's from Bank of America. And on the back, it says "Zero percent intro APR."

SHAILESH MEHTA: Yes, but there is an asterisk, or whatever that mark, so I have to now read that footnote. I will have to remove my glasses to read it. It says for this, "See disclosure summary insert for details." Now I have to find a disclosure summary, which is the one here.

So on the outside, it says zero percent APR. In here, it says that my APR is 11.9, 15.9 or 19.9, right, and the APR you receive is determined based on your creditworthiness. So I have no idea which one I'm going to get when they approve me.

LOWELL BERGMAN: So disclosure, you say, doesn't work?

SHAILESH MEHTA: [laughs] I mean, look at how much time it takes for both of us to go through this!

LOWELL BERGMAN: Yeah. Exactly.

SHAILESH MEHTA: I think that your average consumer is not going to be able to translate to what the real pricing is.

LOWELL BERGMAN: Now, you put out statements like this from Providian?

SHAILESH MEHTA: We did. We did absolutely.

LOWELL BERGMAN: Well, the criticism is, is that it's exploiting the customer, the fact that they don't really understand what's going to happen.

SHAILESH MEHTA: In a way, I will say yes. In a way, the pricing was designed that it will require a degree of some sort to understand how many different ways I'm paying and what I'm paying. I mean, borrow on a credit card, nobody knows what the real cost is.

[www.pbs.org: Read Mehta's extended interview]

LOWELL BERGMAN: [voice-over] That would be true for this man, Don Bollinger.

DON BOLLINGER: I've always paid my bills, but I was running very, very lean and knew that if anything big happened that I'd be in serious trouble. And eventually, it did. It really started when I found out I had tonsil cancer.

LOWELL BERGMAN: Bollinger won his battle with cancer, but then he lost his job.

DON BOLLINGER: It was just a train wreck. Because of a delinquent payment on a totally unrelated debt that I had, one of the credit card companies told me that they were going to increase my rate from, like, 8.9 percent up to 19 percent. When I heard that, I immediately made a phone call and attempted to protest it.

And I didn't understand at all. I didn't understand how something not related to their loan, the money I owed them, would cause them to increase my rates.

LOWELL BERGMAN: Soon after, Don Bollinger's other credit card bank also raised his interest rate. That made even his minimum payments unaffordable and started a downward spiral of missed payments and fees.

DON BOLLINGER: It's not fair. It's deceptive.

LOWELL BERGMAN: But credit card companies say the practice has been a legitimate tool to limit their exposure to higher-risk customers.

SHAILESH MEHTA: In my cardholder agreement, I said that, "If you are delinquent somewhere else, I have a right to increase your rate." Now, you may be delinquent on someone else for whatever reason. Suddenly, my rate will shoot up from 21 to 28 percent.

LOWELL BERGMAN: [on camera] That's universal default, it was called.

SHAILESH MEHTA: Universal default, because they needed more and more stealth pricing, more and more penalty pricing.

LOWELL BERGMAN: [voice-over] There is a reason why credit card companies have been allowed to make these sudden changes to the interest rate. In the United States, credit cards have functioned within a system where it is legal for card issuers to charge any fee or any interest rate they want without limits.

ROBERT McKINLEY, Founder, CardWeb.com: The credit card industry has always been the Wild West. The card issuers held all the cards. They could do anything they want- $39 late fees and $35 over-limit fees and 30 percent interest rates. And yes, it got crazy. Competition ramped up to such a level that it created an industry that was out of control.

LOWELL BERGMAN: The industry got out of control because over the last 30 years, regulations on banks and consumer lending that had been in place since the Great Depression were steadily eliminated.

Sen. CHRISTOPHER DODD (D-CT), Chmn., Banking Committee: The cops left the streets. There was no one on the beat.

LOWELL BERGMAN: Christopher Dodd of Connecticut is the chairman of the Senate Banking Committee

Sen. CHRISTOPHER DODD: Where were the regulators in all of this?

LOWELL BERGMAN: He says that for decades, both Republicans and Democrats voted for deregulation.

Sen. CHRISTOPHER Dodd: Hey, look, I voted for it. I mean, I-

LOWELL BERGMAN: [on camera] You voted for the deregulation.

Sen. CHRISTOPHER DODD: Yes. But we were wrong. And the message out there to the financial industry was, "Go ahead and do what you want. The market will take care of this. The market will protect people."

LOWELL BERGMAN: [voice-over] And that was the dominant ideology of the era supported not just by Congress and the White House, but by the alphabet soup of bank regulators, like the Federal Reserve, the OCC and the FDIC, all of whom rarely intervened on behalf of consumers.

[on camera] Well, some people have said that we had the appearance of regulation so people thought somebody was watching, but nobody was.

Sen. CHRISTOPHER DODD: Well, that's a fact, we now know. There was a lot of regulator power and authority out there, but they walked away from it. It was an intentional decision, where they literally knew they had the responsibility and made the conscious decision not to exercise the powers that they had.

LOWELL BERGMAN: [voice-over] And the result for credit cards was that a system developed in which the affluent paid the least and the most vulnerable people paid the most.

Prof. ELIZABETH WARREN, Harvard Law School: This is one of the dark secrets in this industry. People who are operating closer to the margin, those are the people who get trapped. Those are the people who produce the enormous revenues in the system.

SHAILESH MEHTA: In a strange way, the banks were charging borrowers higher interest rates in order to give the wealthy people a break, in a strange way, if you look at it, because the people who have money were paying in full, and they were getting the break at the expense of the people who couldn't pay in full.

LOWELL BERGMAN: Mehta resigned from Providian in 2001 after the company had to pay $300 million dollars following a rare investigation by federal regulators. But if Mehta left the industry, the practices he helped create would live on, spreading throughout the world of consumer lending.

NEWSCASTER: The Dow has lost nearly 1,400 points.

LOWELL BERGMAN: And then the economy started to fall apart.

Pres. GEORGE W. BUSH: The drop in the stock market yesterday represented more than a trillion dollars in losses.

LOWELL BERGMAN: The collapse of the stock market was triggered by a collapse in the consumer lending bubble.

NEWSCASTER: More bad news on the housing front.

NEWSCASTER: Home foreclosures continue to skyrocket.

MARTIN EAKES, CEO, Center for Responsible Lending: We are focused on the current economic crisis as primarily a foreclosure and mortgage crisis. But what most people don't realize is that when subprime lending was really taking off, it was because people had credit card debt they couldn't afford, and the outlet was to refinance that debt into a subprime mortgage.

TELEVISION COMMERCIAL: Find out how easy refinancing can be.

TELEVISION COMMERCIAL: Combine all your high rate credit card debt into one easy loan. Apply now.

ROBERT McKINLEY: You had consumers refinancing their homes and taking equity out, and they would pay off all their credit cards.

TELEVISION COMMERCIAL: I've got a four-bedroom house in a great community.

LOWELL BERGMAN: There was a huge push to refinance through ads like this one.

TELEVISION COMMERCIAL: Like my car? It's new. How do I do it? I'm in debt up to my eyeballs. Somebody help me.

ROBERT McKINLEY: What was happening is that some of these consumers were already running out of rope. This just gave them a little more rope by consolidating. And then they went back out, and of course, built their credit cards back up.

MARTIN EAKES: You know, it doesn't take a rocket scientist to figure out that if you keep borrowing and borrowing in order to consume now, eventually, you crash and burn.

NEWSCASTER: Employers cut another 663,000 jobs last month.

NEWSCASTER: Forecasters have said unemployment will continue to rise.

LOWELL BERGMAN: And today, with double-digit unemployment, those credit card borrowers are increasingly unable to pay.

COURT CLERK: -this proceeding will be the truth, the whole truth and nothing but the truth, so help you God?

DON BOLLINGER: I do.

LOWELL BERGMAN: Don Bollinger, like millions of others, had refinanced his credit card debt into his mortgage. And so when he lost his job, the extra debt he took on led him into bankruptcy.

TRUSTEE: That's all the real estate that you have?

DON BOLLINGER: Yes.

It's been hard. And it still is. For some of us, they just make it impossible to do the right thing. I'm just, you know, some guy that's laid off, live out in the country. But from what I see, it's just greed. And you just struggle and you keep praying that Washington'll going to pass something that's going to reach down and help me, and it never happens.

LOWELL BERGMAN: In fact, in the U.S. Congress, there have been some who have argued for credit card reform for decades.

Sen. CHRISTOPHER DODD (D-CT), Banking Committee: The list of troubling practices the credit card companies are engaged in is lengthy and it is disturbing.

LOWELL BERGMAN: But passing legislation to rein in the industry proved to be impossible-

LOWELL BERGMAN: -because the banks are one of the most powerful lobbies on the Hill.

Sen. CHRISTOPHER DODD: The industry got carried away, got arrogant. And they could never be beaten, so they could do whatever they wanted to. And it was always- when I counted noses, I didn't have the votes.

LOWELL BERGMAN: Senator Richard Shelby is the ranking Republican on the Banking Committee. While he has never been known as an advocate for credit card reform, he's not always sided with the banks.

[on camera] Why hasn't there been credit card legislation to control some of these abusive practices? Why did it take a near depression to do this?

MARTIN EAKES, CEO, Center for Responsible Lending: It's really hard to get a bill through the U.S. Senate when the industry is pouring money into Washington. It's very difficult environment to have a reform bill passed.

LOWELL BERGMAN: [voice-over] Nearly every member of the Senate Banking Committee has received large contributions from the financial services industry, including the chairman of the committee, Senator Dodd.

[www.pbs.org: Tracking the lobbying money]

[on camera] The financial services industry apparently has given as much as $30 million to the members of your committee over the last election cycle, $7 million to your campaigns.

Sen. CHRISTOPHER DODD: Lot of good it's done them, huh? [laughs]

LOWELL BERGMAN: Are you saying they're wasting their money, giving you campaign contributions?

Sen. CHRISTOPHER DODD: Oh, not necessarily. I listen to people. But anybody who thinks they can come in and make a campaign contribution is going to get an outcome based on that is certainly terribly mistaken.

The need to reform credit card practice has never been more important.

LOWELL BERGMAN: [voice-over] Dodd points to the fact that he introduced legislation to take on the credit card industry earlier this year, as did his colleague in the House, Congresswoman Carolyn Maloney.

It had gotten to the point that I couldn't even go to the floor of Congress without hearing stories about credit card abuses. And it was really getting out of hand.

We need to protect our consumers, not-

LOWELL BERGMAN: Times were different now. Many Americans were demanding change.

STEPHEN LABATON, The New York Times: The Obama administration had done its own polling and seen that there was deep anger and hostility out in the country towards credit cards, and the administration knew that this would be an easy political target.

LOWELL BERGMAN: [voice-over] Timothy Geithner is the Secretary of the Treasury.

TIMOTHY GEITHNER: You know, we can't tell the American people that we're going to forget the damage caused by this and leave this system basically as it was. We're not going to do that.

LOWELL BERGMAN: but even with the new political realities, it would still be a big battle to get the legislation passed.

Rep. CAROLYN MALONEY: I didn't even know whether it was going to get out of committee. Industry people were coming up, "Oh, Carolyn," you know, "we'll work with you on other things." They were basically saying, "We know we've won. You've lost." Everybody was smiles.

LOWELL BERGMAN: In the end, the law made it through Congress. It makes it more difficult for credit card companies to suddenly change interest rates, something that might have saved Don Bollinger and countless others like him from bankruptcy.

Rep. CAROLYN MALONEY: It ends the most abusive practices, like "anytime, any reason" retroactive interest rates increases practices that have trapped many Americans in debt.

Pres. BARACK OBAMA: But the real test of change ultimately is whet her it makes a difference in the lives of the American people.

[www.pbs.org: How the new rules affect you]

LOWELL BERGMAN: By the time the bill was ready for signing, the Republicans had joined in, having won major concessions from the Democrats.

ROBERT McKINLEY, Founder, CardWeb.com: This legislation, while it is significant, probably the most significant in the card industry's history, it still doesn't go far enough to clean up a lot of the practices.

Prof. ELIZABETH WARREN, Harvard Law School: It was an important win in the sense that it said the banks may not completely own the legislative process anymore.

LOWELL BERGMAN: [on camera] But it wasn't really a great win for consumers.

Prof. ELIZABETH WARREN: It's a set of very discrete new laws, and the credit industry instantly set to work on how they could run around them. By itself, that set of rules won't change the game.

LOWELL BERGMAN: [voice-over] One battle the banks won was the ability to keep charging whatever interest rate they want.

MARTIN EAKES, CEO, Center for Responsible Lending: This credit card bill does not regulate interest rates. The credit card companies are able to impose an interest rate of whatever they want to charge- for instance, a penalty rate on a credit card if you're 60 days late. So here we are in a period of unprecedented unemployment, and everyone who loses their job is going to become 60 days late on their credit card bill. What sense does it make to let someone, when they're down, get stomped on by increasing their credit card interest rate from 9 percent to 29 percent? And even under this bill, that would still be permitted.

LOWELL BERGMAN: Another major loophole in the law was an eight-month gap between the president signing the law and when the law would go into effect.

[on camera] Congress gave them eight months to put it into law.

Sen. CHRISTOPHER DODD: Well, my original bill I had to go- the original bill I authored said it's effective the day the president signs it. That was my original bill. But I never would have gotten out of committee with that bill, so we had to change the dates on it. I would have loved to have done it earlier than that, but I didn't have the votes to do it.

LOWELL BERGMAN: [voice-over] The banks have used this time to full advantage. They've locked their customers into higher interest rates on existing balances, cut credit lines and imposed more fees and penalties.

Pam Suwinsky is a freelance book editor who recently received a letter from her credit card company.

PAM SUWINSKY: The first letter I got was from Nordstrom Visa. "Because you're such a valued customer, we know times are tough, we're making changes to your account." And I thought, "Hey, this is great. Maybe they're going to lower my interest rate."

But the small print on the inside said that they were going to raise my interest rate and that it was going to be retroactive to any existing balance that I had. That alarmed me, but it didn't stop there.

LOWELL BERGMAN: Soon after, the rates went up on her other cards.

PAM SUWINSKY: I will say that I panicked. I called and asked them why they had raised my rates. What had I done? And they said, "We just changed our terms." I was someone who regularly carried a balance so my minimum payments increased. And as a result, my expenses tended to be way higher than I had expected them to be.

LOWELL BERGMAN: Credit card companies are also lowering their lines of credit. That's what happened to this man, Ben Collins, a home builder who relies on his credit cards to run his small business.

BEN COLLINS: In the middle of a billing cycle, we received a letter that said our line of credit had been reduced from $35,000 down to exactly what was on the card that day.

The cards were useless at that point, and so the employees that I have all had to basically be issued petty cash, which is very cumbersome and actually somewhat embarrassing. It's embarrassing when, you know, you tell your employee, "Oh, don't use that credit card," when, you know, you're perfectly solvent. They start to think, "Well, is my paycheck going to be good on Friday?"

LOWELL BERGMAN: Collins called his credit card bank, Bank of America, to protest the cutting of his credit line.

BEN COLLINS: [on the telephone] And there's nobody that I can speak with at this point? OK. Well, thank you very much.

They're having extremely high call volumes. They can't even take your call right now. So my guess is that the poor little six people in that department are busy now. They're the few people who don't have to worry about their jobs at Bank of America.

LOWELL BERGMAN: The new credit card act is not going to help small business owners like Ben Collins. Their cards are excluded from the law.

BEN COLLINS: It's a great oversight because companies like mine are the companies that are going to be the first line of hiring. And the more difficult they make it for us to survive and thrive in this economy- it's disappointing and it's left a bad taste in my mouth.

LOWELL BERGMAN: A national survey says that more than 50 percent of Americans have had similar changes to their credit cards of one kind or another. This means that tens of millions of Americans are now facing much higher monthly payments on their bills, which is especially tough in a bad economy.

PAM SUWINSKY: I'm hanging on, is where I am. I am doing as much as I can to increase my income, but at this time, I feel more precarious than I've ever felt in my life.

LOWELL BERGMAN: [on camera] The banks have used this period of time to raise interest rates, cancel credit lines. What's that all about?

JOE NOCERA, Columnist, The New York Times: The banks are scared of credit card losses, which have been piling up dramatically. So one way to deal with those losses is to try and make more money from everybody else, to put the burden on the people who were still paying. It's really that simple.

LOWELL BERGMAN: [voice-over] FRONTLINE asked the major credit card banks for interviews and they refused, referring us to their lobbyist, the American Bankers Association. Nessa Feddis is a senior counsel and vice president of the association. She says the increases in interest rates and the cutting of credit limits shouldn't be surprising.

NESSA FEDDIS, V.P., American Bankers Association: Congress understood when they adopted the rule that credit cards would be more difficult to get, limits would be lower, and interest rates would be higher for everyone. But they made the decision that that result was an acceptable consequence, an acceptable tradeoff for the sake of the consumers.

Rep. CAROLYN MALONEY: The industry is now saying that my bill is causing them to raise interest rates. I mean, who are you kidding? What have they been doing? Changing the terms, raising interest rates unfairly, retroactively on balances, changing the rules of the game.

LOWELL BERGMAN: [on camera] The complaint that led to this legislation is that the credit card industry was abusing its customers.

NESSA FEDDIS: Well, the vast majority of cardholders manage their credit well, but there was a group that was confused. And that's what Congress and the press were reacting to.

LOWELL BERGMAN: And those people, how many of them are there, millions? The confused? Are those the people that are going bankrupt?

NESSA FEDDIS: The vast majority- the vast- well, most of the people who end up in bankruptcy or who end up with credit card problems, the underlying problem isn't the credit card. Most customers managed their credit cards well, understood them, but there was a segment that was confused. And they realized that it had to be addressed.

[www.pbs.org: Read the extended interview]

LOWELL BERGMAN: But Senator Dodd and others have said to us, "The industry got arrogant." You started using all these practices that created this problem.

NESSA FEDDIS: Well, once Congress and the regulators identified the problems, they've addressed it, and the industry is moving on. End of story. They'll redesign their model based on the new rules and based on the new- they're moving on.

LOWELL BERGMAN: [voice-over] Faced with record losses, near collapse and a taxpayer bailout the banks have become desperate for revenue and increasingly dependent on a still unregulated source of profits in the card game, the fees they can charge on debit cards. Like small business cards, debit cards were not included in the new legislation.

[on camera] One of the criticisms of the bill is that you didn't include the debit card, which is a companion problem that's growing with consumers.

Rep. CAROLYN MALONEY: It was never in the bill. But it was very, very difficult to pass this bill, and it was the feeling that including debit card reform would have killed the bill.

LOWELL BERGMAN: [voice-over] There are now more transactions with debit cards than with credit cards.

ROBERT McKINLEY: Debit cards right now are growing almost three times as fast as credit card usage is in the United States. Because of the uncertainty that surrounds credit cards, consumers are abandoning their credit products for debit cards.

LOWELL BERGMAN: And consumers feel that debit cards are safer.

ROBERT McKINLEY: With debit cards, of course, you're using your own money But debit cards can be, under certain circumstances, even more expensive that credit cards.

LOWELL BERGMAN: Because just like your credit card there is a trap built into debit cards. That trap has its origins 20 years ago with an idea popularized by this man, Texas-based banking consultant Bill Strunk. Strunk convinced banks that they should allow customers to overdraw their accounts and charge them a fee to do it.

[on camera] What you saw 20 years ago-

BILL STRUNK, Banking Consultant: Right.

LOWELL BERGMAN: -was that people were writing checks. If they bounced, they would often have to pay more than one fee to the bank?

BILL STRUNK: Oh, absolutely.

LOWELL BERGMAN: Plus to the retailer.

BILL STRUNK: Plus late fees. So I'm saving them the $30 or $40 merchant fee and the late fees, and let alone the embarrassment of it. You know, it's not a nice thing to go home to your wife and tell her that, "Well, they bounced my check."

LOWELL BERGMAN: [voice-over] And Strunk took it a step further by convincing clients to make the checking accounts free to entice more customers.

[on camera] But was it really free?

BILL STRUNK: Sure. No service charge, no nothing - no maintenance fees, nothing. There was no charge whatsoever on the account.

LOWELL BERGMAN: Except overdraft fees.

BILL STRUNK: That's not in the fee schedules. That's a separate fee.

LOWELL BERGMAN: But is that what, in the end, would pay for the free checking-

BILL STRUNK: Yes.

LOWELL BERGMAN: -the fees from that?

BILL STRUNK: It would. The two best marketing words in the United States are "free" and "all you can eat." People love that. So they love free checking. And it brought in a lot of customers that didn't have a checking account before.

LOWELL BERGMAN: So why not offer them free checking-

BILL STRUNK: Right.

LOWELL BERGMAN: -and pick up the money-

BILL STRUNK: Other ways.

LOWELL BERGMAN: [voice-over] The concept of paying overdrafts, loaning customers money when their accounts are empty, quickly caught on at banks across America because it was so profitable. And those profits exploded when the banks began to attach debit cards to those free checking accounts, producing billions of dollars in revenue.

[on camera] They don't charge a fee to give you a debit card.

ROBERT McKINLEY: They're free until you make a mistake, and then you'll pay dearly.

JOSETTE WERMUTH, High School Teacher: It's just easy when you have a debit card to use it. But one month, I didn't get the deposit from my tenant and I didn't realize it. I bought a small pizza for $7 and ended up getting charged a $33 fee. So it ended up being a $40 pizza.

LOWELL BERGMAN: [voice-over] The bank covered the $7 dollar pizza purchase, even though her account was empty. And then they charged her a $33 fee, the equivalent of over 24,000 percent annual interest rate for a one-week loan. And not knowing she was incurring overdraft fees, Wermuth continued making purchases. All the while, she thought she was getting free checking.

[www.pbs.org: Recent changes on overdrafts]

JOSETTE WERMUTH: When I signed up for the account, they told me that it was free checking. And I asked if there was any hidden fees, and they said no. But that month, I ended up spending about $365 in fees. I really felt like I was being gouged. And I called them, and they just don't budge.

LOWELL BERGMAN: Wermuth also tried to get the overdraft protection shut off, but the bank told her it was an automatic service that could not be removed.

JOSETTE WERMUTH: They just will not make any concession at all.

LOWELL BERGMAN: Bill Strunk and the banks insist that despite complaints like Wermuth's, most customers want the overdraft service and most banks need it.

BILL STRUNK: [on the telephone] You need more income, and I think there might be some improvement we can help you with.

LOWELL BERGMAN: Strunk says his idea was embraced by the banks so they could compete with storefront lenders who offered short-term loans. They're called payday lenders.

BILL STRUNK: Payday lenders were proliferating like you wouldn't believe. There's a consumer demand for short-term financing that the bankers didn't realize. I used to ask the bankers, "Well, what are you going to do about that?" They'd go, "I don't know. I don't know what to do about it." You know, "I can't compete with those people," because they were open 24 hours a day or seven days a week or whatever the case may be. And the point is that there's a demand for this thing.

LOWELL BERGMAN: Across America, there are twice as many payday lender storefronts as there are Starbucks. They're not regulated by the federal government, but they lend out over $40 billion dollars a year

California Check Cashing CEO Rick Lake runs a chain of 100 stores like this one, and he agreed to show us how a payday loan works.

[on camera] You wanted my ID, right?

[voice-over] With valid ID and proof of employment and a checkbook, customers can come in for cash.

STORE CASHIER: And you've been approved for the max, which is $255.

LOWELL BERGMAN: They write a personal check, and the store holds onto it, agreeing to cash it on the day they are paid. It's a small short-term loan.

STORE CASHIER: So you are going to initial here.

LOWELL BERGMAN: [on camera] Oh, so there's contract to sign?

RICK LAKE, CEO, California Check Cashing: Correct.

LOWELL BERGMAN: They're not like one of those credit card agreements, are they?

RICK LAKE: They are contracts, but we do make sure that there's 12 point type on them.

LOWELL BERGMAN: And then it's in Spanish, as well. That's it. That's the whole thing?

RICK LAKE: So the APR is disclosed, the fee. You know exactly what the terms are. There are no surprises and there's no accumulating interest.

LOWELL BERGMAN: [voice-over] This transaction is illegal for military personnel and is outlawed in 15 states and the District of Columbia because of those fees.

[on camera] Two hundred and fifty-five dollars.

[voice-over] That $255 dollars cost $45 in fees. That's the equivalent of an annual interest rate of 460.08 percent for a two-week loan. And the big problem with payday loans isn't just the interest rate, critics say, it's that people get trapped in a cycle of debt.

1st WOMAN: I was a single mother and I would get payday loans continuously for five years. Every time I got paid, I would pay it off and I would get another one.

2nd WOMAN: Actually, I didn't have quite have enough to meet all my bills so-

LOWELL BERGMAN: This woman told us she came to get a payday loan to pay her off her credit card bill before she got a late fee.

3rd WOMAN: So you know, it's not too good, but you know, if you're in a jam, you do what you have to do.

RICK LAKE: Whether you like the service or not, wouldn't you like to have the choice of using it?

LOWELL BERGMAN: [on camera] What people say is that this is a debt trap, that you wind up at the end of every month taking out another loan to pay back last month's loan. Not true?

RICK LAKE: Debt trap? To me, the common sense definition of that is that there's something unknown about the product. You've been in our stores. You've seen our posters. You've seen our disclosures. Did you at any time feel that there was something you didn't know?

LOWELL BERGMAN: But to the criticism that the most valuable customers for you are the people who revolve continuously, that in the end, the amount of money someone pays back may be far beyond the cost of the actual loans themselves.

RICK LAKE: Lowell, all I can tell you is that it's not the majority of our customers.

LOWELL BERGMAN: But it's the most profitable part of your customers.

RICK LAKE: It's not the majority of our customers. Now, it's no different than someone who, you know, pays a late credit card. Wouldn't you say that they- they generate the most in fees? Those that overdraft their bank account generate the most in service fees. I mean, that is the reality of it.

LOWELL BERGMAN: Well, the reality is that, in a sense, those who least can afford it-

RICK LAKE: Right.

LOWELL BERGMAN: -pay the most in the banking industry in general and credit cards in general. And it sounds like that's the same in payday lending.

RICK LAKE: It's- I would say it's true throughout the finance world.

LOWELL BERGMAN: [voice-over] Rick Lake says not only do the poor and those living paycheck to paycheck pay more, but it's difficult for them to find out how much they're paying when they go to a bank because banks intentionally never fully reveal to customers how their overdraft system works.

BILL STRUNK: As long as you keep your account in good standing, as a non-contractual courtesy - that's a big word - we're going to- we're going to consider paying your checks up to $300, $500 in the overdraft.

LOWELL BERGMAN: [on camera] You used two words in there, "non-contractual" and "courtesy."

BILL STRUNK: Right.

LOWELL BERGMAN: Why those two words? Why not just simply say, "We're going to," I don't know, "make a deal with you?"

BILL STRUNK: Because we didn't want it to fall under other TILA regulations and so forth about lending.

LOWELL BERGMAN: That's the Truth in Lending Act?

BILL STRUNK: The Truth in Lending Act.

LOWELL BERGMAN: TILA.

BILL STRUNK: We didn't want to do that.

LOWELL BERGMAN: [voice-over] The Federal Truth in Lending Act requires an institution to reveal the annual percentage rate, the cost of a loan. And similar state laws do the same thing. That's why you saw those posters in the payday lending store. But the banks are careful to not call overdraft protection a loan. They call it a courtesy.

LOWELL BERGMAN: So from your perspective, if the banks were to be fair to their customers, they'd have posters up on their walls.

BILL STRUNK: I think that that is the direction that financial services needs to head in, you know, so everyone knows exactly what they're paying and why. To me, "predatory" means not knowing. And I would say that anyone that lends money without telling the consumer exactly what they're paying, that to me is my definition of predatory.

LOWELL BERGMAN: Don't banks charge these fees over and over again, sometimes six, seven, eight, nine, ten times a month or more?

BILL STRUNK: Some banks do.

LOWELL BERGMAN: And the fees on the tiny transactions, on the small transactions, but you're doing is you're making somebody pay more in a penalty than the actual value of the thing that's bought. That's why people are irritated by.

BILL STRUNK: They are irritated by that. It would irritate me, too.

LOWELL BERGMAN: I got a $35 cup of coffee.

BILL STRUNK: That's absolutely true. That's what happens. That's why it's the consumer's responsibility to keep up with his checkbook, not the bank's responsibility. It never has been the bank's responsibility, not from day one.

LOWELL BERGMAN: Why can't the bank deny the purchase at the point of sale?

BILL STRUNK: They could, if they wanted to, if they wanted to-

LOWELL BERGMAN: But they don't. They used to.

BILL STRUNK: Some do.

LOWELL BERGMAN: But you do agree that if you apply this fee structure in a way that takes advantage of the individual, seven, eight, nine charges in a day-

BILL STRUNK: Right.

LOWELL BERGMAN: -on a debit-

BILL STRUNK: That that's abusive. I agree with that. I agree with that.

LOWELL BERGMAN: [voice-over] Bill Strunk says that many of the big banks have taken his concept of overdraft fees too far. They do that by not processing checks and debit card charges to your account in the order they are received. They use a computer program so the banks can pick out the biggest amounts first and charge them against your account. This empties your account faster, resulting in more overdraft fees for each of the smaller amounts.

[on camera] There's no restriction on a bank ordering that way.

BILL STRUNK: No. That's correct.

LOWELL BERGMAN: And if they're going to make more money doing it that way-

BILL STRUNK: That's correct.

LOWELL BERGMAN: -that's a big temptation to do it.

BILL STRUNK: That's correct.

LOWELL BERGMAN: [voice-over] Scott Talbott is a Washington lobbyist for the Financial Services Roundtable, which represents the largest banks. And he defended this practice.

SCOTT TALBOTT, V.P., Financial Services Roundtable: The program is set up to honor what the customers have told us they want. We've set up on a high to low, right? We've told you that up front, we were going to process them from high to low. That's what customers have told us they want- "Process my mortgage first. Process my student loan first. Process my car payment first." And then all the other transactions, the smaller ones.

LOWELL BERGMAN: [on camera] Which customers have told you this? When? No one ever asked me.

SCOTT TALBOTT: Yeah, that's- as I've told you- you asked me if there was a survey. There wasn't a survey. This is the years of working with our customers to find out what they want, and this is what they've told us.

LOWELL BERGMAN: Even if they knew, and you told them at the time that this may cost you more money in fees?

SCOTT TALBOTT: Yeah. I mean, that- that's- we don't- again, there was no survey per se. We didn't set out and-

LOWELL BERGMAN: Well, what is based on then? What are you basing it on?

SCOTT TALBOTT: It's based on years and years of experience with customers telling us what they want.

JOE NOCERA, Columnist, The New York Times: The banks feel a need to try and show profitability right now. And they've gotten so hooked on fees that it's almost like a Pavlovian reaction to a problem. "Oh," you know, "losses are going up. Well, we know how to solve that. Let's just put on some more fees."

Prof. ELIZABETH WARREN, Harvard Law School: The banks want to be able to continue business as usual. Indeed, they're scurrying around right now, trying to figure out what other tricks and traps they can put in so they can drive up their revenues. And with no cop on the beat, that's what they will continue to do.

LOWELL BERGMAN: [voice-over] Elizabeth Warren is a law professor at Harvard and an adviser to Congress who has proposed a new way to regulate the banks.

Prof. ELIZABETH WARREN: We need an agency, rather than Congress gearing up every 25 years and writing a few specific rules. We need an agency that is responsive to the changes in the industry.

LOWELL BERGMAN: In Washington today, Warren's idea has been taken up by the Obama administration and its secretary of the Treasury, Timothy Geithner.

TIMOTHY GEITHNER: Banks did a lot of bad things that should not have happened, and we need to fix the rules, make them tougher. But you need to enforce them more fairly, more evenly across everybody who's in the business of providing a kind of credit product to a consumer.

LOWELL BERGMAN: Geithner is a veteran of the Federal Reserve who once embraced financial deregulation. But now he's in charge of imposing tougher regulation on the banks.

[on camera] I have to ask, then, you were at the Federal Reserve. You had that authority. Why didn't you do it then?

TIMOTHY GEITHNER: The Fed got a lot of things right, but the Fed did not move early enough to use the authority that Congress gave it to write stronger rules. But even with better rules, the system wouldn't have worked well enough. We got to fix that, make that better.

Sen. CHRISTOPHER DODD (D-CT), Banking Committee: That is why many of us call for the creation of an independent consumer protection agency whose sole focus is the financial well-being of consumers.

LOWELL BERGMAN: [voice-over] Senator Dodd and the Democratic leadership in Congress have backed this new proposal.

Sen. CHRISTOPHER DODD: And the administration has sent us a very bold plan for that agency.

LOWELL BERGMAN: The agency would have regulatory powers across the entire industry- credit cards. debit cards, pre-paid cards, as well as mortgages and even payday lenders.

[www.pbs.org: More on the proposed new agency]

JOE NOCERA: The idea is to create a brand-new agency because the current regulators the FDIC, the Fed, the controller of the currency have a fundamental conflict, which is, on the one hand, they're supposed to look out for consumers. That is part of their franchise. But on the other hand, they're supposed to look out for the safety and soundness of the banking system. And guess what? When you gouge consumers, you're actually helping the safety and the soundness of the banking system.

JOHN C. DUGAN, Comptroller of the Currency: We have significant concerns with the parts of the proposed CFPA-

LOWELL BERGMAN: The very same regulators who had failed to crack down on the banks lined up to criticize the proposed agency.

SHEILA C. BAIR, Chairman, FDIC: -as a consequence, we see little benefit to regulatory consolidation and the potential for great harm.

TIMOTHY GEITHNER: You have a lot of people with a vested interest in what you call regulatory turf, and they're trying to protect that turf.

JOHN E. BOWMAN, Dir., Office of Thrift Supervision: We suggest, as bank regulators, we can do it more effectively.

LOWELL BERGMAN: Behind closed doors, at a meeting at the Department of the Treasury, Geithner would take those regulators to task. The meeting included his former boss, Ben Bernanke, the chairman of the Federal Reserve.

STEPHEN LABATON, The New York Times: Ben Bernanke was there. Sheila Bair was there, the other top regulators. And Geithner was using words that we couldn't print in a newspaper, using expletives to express his frustration. Geithner made it clear to them that, in his eyes, what they were doing threatened to undermine the legislation.

LOWELL BERGMAN: [on camera] You got irritated with them.

TIMOTHY GEITHNER, Secretary of the Treasury: Well, I'd like them to put the interests of the country ahead of the interests of their particular agency because, you know, you can't look at the system and say it's served the American people. It basically failed. And we are engaged in a just and necessary fight to basically change the things that are broken in our system and to reform and put in place a stronger set of protections.

EDWARD L. YINGLING, CEO, American Bankers Association: The breadth of this proposal is in many respects shocking-

LOWELL BERGMAN: [voice-over] But Geithner and the administration have more than the regulators to convince. The Republican leadership in Congress and many in the banking industry are opposed.

BILL STRUNK, Banking Consultant: Well, I don't like it because- I'm not a liberal. I don't like the government dictating to bankers. It's none of their business. It's a free enterprise system. Let the market work and it'll take care of itself.

Sen. BOB CORKER (R), Tennessee: I think this is a tremendous overreach, and very disturbing.

Sen. RICHARD SHELBY (R), Alabama: This is a radical departure from the way we have regulated.

LOWELL BERGMAN: Some in Congress say they fear that the new agency will stifle the free market, damaging the safety and soundness of the banks.

Sen. RICHARD SHELBY: I think the safety and soundness of our banking system should be the number-one priority

LOWELL BERGMAN: [on camera] The Republicans are united in their opposition to this Consumer Financial Protection Agency?

Sen. RICHARD SHELBY: Well, I think that the Republicans are interested in consumer protection. We all are consumers. But without safety and soundness, strong banks, there's no banking system. So you've got to have that. I think that's paramount, number one. And a close number two would be us as consumers.

LOWELL BERGMAN: Senator Shelby says you cannot divorce protecting consumers from the soundness of the banks. And if you divide it up, it's just not going to work and you're going to create, he recently said, a "nanny state."

TIMOTHY GEITHNER: I don't think he's right. We lived with a system where you had people responsible for safety and soundness doing consumer protection, and they didn't do a good enough job at that. Consumer protection was diffused around a whole different set of agencies. So it was just a complicated mess. And we're trying to do it for a simple, streamlining consolidation of that responsibility in one place.

LOWELL BERGMAN: [voice-over] But there's one major issue that neither the proposed agency or the new credit card law will address.

[on camera] Is there any chance the administration is going to back an initiative, to cap interest rates for consumers? A lot of people are now getting 30 percent interest rates.

TIMOTHY GEITHNER: There is some risk if you take that approach, you're going to end up denying people who would otherwise be able to borrow responsibly access to credit. So that's the trade-off.

[www.pbs.org: More on interest rate caps]

LOWELL BERGMAN: [voice-over] And this is where Secretary Geithner and the industry agree, that there should be no cap, no limit, on credit card interest rates.

[on camera] Why shouldn't you be limited in how much interest or how many fees and how big those fees are?

SCOTT TALBOTT, V.P., Financial Services Roundtable: If the government were to place caps on interest rates or fees, then essentially, what you have is the government setting the market. The government is determining what the rate of interest or rate of return or the rate of fees should be. And that will destroy our free market economy, which is the heart of capitalism.

JOE NOCERA: We are in a historic low-interest environment right now, historic. Treasury bills are practically at zero interest. And yet credit card interest rates are outrageously high. They have not come down as interest rates have come down. This is not the normal workings of the market vis-a-vis interest rates. These are- in effect, they're phony rates that are ginned up by the banks to maximize their profitability.

LOWELL BERGMAN: No one's proposing capping interest rates.

JOE NOCERA: No, they're not, and they're not going to. The Obama administration is very unwilling to do anything truly radical that would hurt the banks. Nobody's saying you can't charge whatever interest rate you want, at least at this point. And I don't- I don't think that's going to change.

LOWELL BERGMAN: [voice-over] While the argument over regulation goes on, the landscape for the consumer in America has already fundamentally changed it's simply harder to get a loan of any kind.

NESSA FEDDIS, V.P., American Bankers Association: Between the new rules and the economy, we expect that it'll be harder for people to get credit cards. So we do know, and we're already seeing it, that small businesses and companies will have a harder time getting credit cards, limits are going to be lower, and interest rates going forward are going to be higher.

MARTIN EAKES, CEO, Center for Responsible Lending: When I hear from the industry, "Oh, you're going to remove access to credit," I sort of shake my head and say, "Yes, that's exactly what's needed." There needs to be less debt in this system. Americans simply cannot pay back the level of debt that has grown over the last 30 years.

LOWELL BERGMAN: [on camera] But they bought into this. This is the American way.

MARTIN EAKES: Well, if the great American economic value is translated to say, "We must provide debt to people who can't pay it back," then the great American way has lost its way.

LOWELL BERGMAN: [voice-over] A long way from the arguments in Washington about laws and regulations, credit card pioneer Shailesh Mehta knows that there are some fundamental truths about human nature and money and bankers.

SHAILESH MEHTA: Bankers will figure it out to comply and say, "As long as I'm in compliance with what the government says, it's none of anybody's business to tell me what to do." That's the kind of mindset with which some people work, "Tell me the rules, and then I'll outsmart you all."

LOWELL BERGMAN: [on camera] They'll find the loophole.

SHAILESH MEHTA: Yeah, I mean, because you guys are none of you smart enough. You make the stupid laws, I'll comply and I'll make money. It's "market will bear," you know? And there are always some desperate people who will take the product. Lending money to people is never a difficult exercise. People will take money if you're willing to give them.

SPECIAL THANKS
Investigative Reporting Program of the
UC Berkeley Graduate School of Journalism
The Reva and David Logan Foundation
University of California, Washington Center
Celeste Phillips
Levine, Sullivan, Koch & Schulz

A FRONTLINE Co-Production
with Cam Bay Productions and
The New York Times

Copyright 2009
WGBH EDUCATIONAL FOUNDATION
ALL RIGHTS RESERVED

FRONTLINE is a production of WGBH/Boston,
which is solely responsible for its content.

ANNOUNCER: There's more to explore at FRONTLINE's Web site, where you can watch the full program again on line, plus extra video, read our extended interviews, explore some other angles on this story. What kind of credit products are used by the military? Are credit unions a good alternative? And what are the remaining fee traps for consumers, despite new regulations? Then share your own stories and comments at PBS.org.

Next time on FRONTLINE-

- Mr. Madoff, what do you have to say for yourself?

ANNOUNCER: How did Bernie Madoff do it?

- The harder it was to get in, the more you wanted to get in.

- A lot of middlemen, a lot of skimming-

ANNOUNCER: And how did he keep it a secret for so long?

- Nobody could get to him. That's how he built his mystique.

- You see a willful ignorance.

- Nobody wants to get in the way of all this money.

ANNOUNCER: Inside The Madoff Affair. Watch FRONTLINE.

FRONTLINE's The Card Game is available on DVD. To order, visit Shoppbs.org or call 1-800-PLAY-PBS. [$24.99 & s/h]

FRONTLINE is made possible by contributions to your PBS station from viewers like you. Thank you. With major funding from the John D. and Catherine T. MacArthur Foundation, committed to building a more just, verdant and peaceful world. Additional funding from the Park Foundation.